Annuity FYI Blog

MetLife made big news in mid-March by failing a Federal Reserve “stress test” administered to 19 megabanks. Federal regulators are expected to classify it eventually as a “Systemically Important Financial Institution,” i.e., “Too big to fail.”

Should that make you eliminate MetLife from your list of acceptable annuity providers? I don’t think so.

If you follow annuities, you probably regard MetLife as a big publicly held life insurance company that also issues a lot of annuities. In fact, MetLife sold far more variable annuities in the U.S. in 2011—over $28.4 billion worth—than any other insurer.

But the Federal Reserve sees MetLife as a bank holding company, because for the past 10 years or so it has owned MetLife Bank, a multi-billion institution that during the mid-2000s even dabbled in the ill-fated home mortgage business.

So, with 18 other huge banks (but no other insurers), it participated in the 2012 Comprehensive Capital Analysis & Review (CCAR) by the Fed; results were published March 13. MetLife and three others failed the test because they had, the Fed said, risk-based capital ratios of less than 8%.

That was embarrassing for MetLife. But it may not be relevant. For one thing, MetLife expects to divest its banking business this year. For another, by insurance industry standards (as opposed to banking standards) MetLife has a consolidated risk-capital ratio of 450%, according to a statement issued by its CEO.

As an annuity shopper, you might be concerned about all those billions of dollars in MetLife Investors Series variable annuity contract assets that are guaranteed by MetLife to produce lifetime incomes for their owners. But MetLife shouldn’t have a hard time keeping those promises, because most contract owners probably won’t ask it to.

As a GMIB (Guaranteed Minimum Income Benefit), the MetLife lifetime income rider requires contract owners to annuitize their assets in order to trigger the guarantee (which ensures payments for life, even if the account goes to zero before they die). Since most people prefer not to annuitize—they lose direct control over the contents of their account if they do—not many are expected to take steps to trigger the guarantee. Even if they did—in the event of a prolonged recession, perhaps—MetLife is a strong, well-diversified company with a sophisticated risk hedging program. Its failure to pass the recent Fed stress test doesn’t reflect its true strength.

Written by Kerry Pechter

We’ve talked a lot in this blog about the recent federal government interest in annuity products and their use in retirement.  Christi Roberts’ Annuity News Journal article, “Annuity rules proposed by treasury,” details some of the proposed changes and their purpose for Americans.  Companies holding 401k’s or pensions have been concerned about offering annuities because they believe the fees are high and they may choose the “wrong” insurance company.  The government is looking for ways to make it easier for an individual to do their own transfer of 401k money into an annuity.

There has also been a lot of talk recently about longevity annuities.  These annuity products pay out money starting at age 80 or 85.  Another option discussed by the federal government is allocating a percentage of your money, say 80%, to be paid immediately and saving the remaining percentage to be paid out at some point in the future.  All three solutions offer great benefits to retirees and to investors.

The federal government is focusing a lot on annuities because of the guaranteed income you will be paid out over your lifetime.  If your investments run out of money while you are still living, you’ll have your annuity income to rely upon to carry you through the rest of your life.  Your payments are guaranteed as long as you choose a solid insurance company that is still around.  As Americans live healthier and longer lives, the government wants to make it easier to use some of your money to purchase an annuity for its guaranteed lifetime income.

Written by Rachel Summit

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Larry Martin of the Leavenworth Times in Kansas has a pyramid example of retirement investing.  In the article “Annuities good retirement savings options,” Martin says that both fixed annuities and indexed annuity products are good options for growing your retirement savings.  His example includes a couple looking to save for retirement and pondering the best options.  The safest investments are at the top of his pyramid and the most risky are at the bottom.  Bank’s savings accounts and CD’s are the safest investments because of their FDIC insurance coverage.  But a savings account will only earn you around .5% in interest and a good CD will earn you around 1.74% in interest.  Since most retirees want to earn more than that, they should probably spread their money around.

Fixed annuities offer better rates than banks, but the historically low rates are still around 3%.  Without FDIC insurance, your payout from fixed annuities is based on the strength of the insurance company and any state guarantees in existence.  Indexed annuity products are the next level in Martin’s pyramid.  They guarantee your principal like a fixed annuity and also base your rate of return on a stock market index.  There are many options to offer you added guarantees for a fee, but some may be worth it to you.  Indexed annuity payouts are also based on an insurer’s strength.  Equities like stocks, bonds, and ETFs are the riskiest investments in the pyramid, but also can offer the highest payouts.  You need to find the best way to balance your desire for gains with your tolerance for risk.  Fixed annuities and indexed annuities are two good investments to help balance your risk and reward.

Written by Rachel Summit

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Vanguard recently made some positive changes to their annuity and mutual fund products, according to Forbes’ Mel Lindauer.  The article, “Welcome changes at Vanguard,” highlights three important changes made by the company.  First, Vanguard eliminated their Asset Allocation Fund, which allowed the fund managers to use whatever percentage of equities they felt was best.  This Asset Allocation Fund had been used in Vanguard’s LifeStrategy Funds and took away the investors’ ability to manage their risk level because they had no control over their asset allocation.

There are two new annuity funds from which to choose if you have a Vanguard annuity.  The new sub-accounts are the Moderate Allocation Portfolio and the Conservative Allocation Portfolio.  The first has 60% stocks and 40% bonds and strives to appreciate your capital while giving you low to moderate income.  The Conservative Allocation Portfolio has 40% stocks and 60% bonds.  It’s purpose is maintaining your current income while providing low to moderate capital appreciation.

A Guaranteed Lifetime Withdrawal Benefit is now available with Vanguard’s annuity products.  It is an option with the new Moderate and Conservative Allocation Portfolios as well as with their Balanced Portfolio.  The Balanced Portfolio has been around for awhile and gives the option of 60-70% stocks balanced with 30-40% bonds.  The GLWB option has been increasingly popular and Vanguard’s annuity holders are excited for this new choice.  Vanguard welcomes new clients who have an annuity they’d like to transfer to one of Vanguard’s new choices.

Written by Rachel Summit

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It just got a whole lot easier for clients of Jackson National Life, as well as for their customer contact representatives.  Their Genius Operations Manual helps customer reps answer any possible question about any one of their annuity products, according to Anthony O’Donnell of Insurance & Technology.  In the article, “Jackson National Life’s “Genius” Project Boosts Annuity Service, Reduces Errors,” we learn that the Genius system gives reps real-time annuity information through the use of Thunderhead’s software.

Since December of 2011, service reps have had the software available for fixed annuities.  It should be available for variable annuities in a couple months.  If a producer or customer calls into the center, the reps almost immediately have access to the client’s specific product, the issue age and state, and the resident state.  The Genius system basically creates an individual product reference guide for Jackson’s customer reps to use with their clients.  It had been difficult to avoid errors in the past, as well as time consuming for reps to search for individual information related to each annuity product and client.  The system was less than efficient.

With more than 5,000 plan codes, SEC regulations, and individual state and territory differences, it was close to impossible to give the best information to everyone.  One of Jackson’s biggest problems was quoting annuity rates because of all that went into an individual quote.  It took at least 9,000 hours of content development and 3,700 programming hours to get the Genius system in place, but Jackson believes that it was well worth the cost.  They just won’t disclose what that cost was.  They haven’t yet determined what metrics they’ll use to gauge success, but they’ve seen the elimination of incorrect annuity rate quoting as well as immediate improvements to service.

Written by Rachel Summit

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